Should banks disclose who they are lending to?

He points to an analysis which shows SBI has invested in Orbital ATK. This is a US based company which is one of the world’s largest manufacturers of ammunition, including cluster bombs, and a leading supplier of precision systems and electronic warfare. On his asking SBI, no information was disclosed. Perturbed he says, banks should disclose their loans and investments to depositors:

The State Bank of India is the country’s largest bank with a 30.2 crore active customer base. Its reaction to the Pax report was that there was nothing illegal about its investment in Orbital ATK.

The State Bank of India refused to answering my queries on whether an investment that would indirectly lead to the killing and maiming of civilians in a war torn country was unethical. Another query asking the bank if it was unethical not to divulge details of its investments to its account holders whose money it reinvested, met with the same fate. But a report in the Economic Times quoted an SBI official as saying that the bank “always works in accordance with local laws and regulations” and there is “no prohibition, whatsoever either in US or in India to finance such commercial projects”.

In India, most banks outline a broad sector-wise distribution of their investments in their annual reports. But account holders don’t have any way to track how their savings, big and small, are being invested.

Apart from the Reserve Bank of India issuing guidelines from time to time, and a few banks adopting voluntary policies on Corporate Social Responsibility or Equator Principles, none of the banks in India have any binding policies to guide their investments – to make sure that their investments don’t cause harm to people or the environment, which impacts all of us.

While banks need to invest or lend to profit-making sectors to help account holders avail of interest on their savings, there will be several account holders who will not want to share in the profits of warfare or from those that cause irreparable damage to the environment.

If banks don’t reveal how my savings are invested, as an account holder, I am unable to make an informed choice. When my savings are part of the State Bank of India’s investment in cluster bombs, I am also guilty for the colossal loss of lives these bombs cause. I wouldn’t want to live with that guilt, or remain with a bank whose investments further fuel such misery. But I will have to wait until I find another bank that clearly says that it won’t make such investments.

Thus, while there is nothing illegal about the State Bank of India’s investment in a company that makes cluster bombs, there is a lot that is unethical.

Hmm..

So far these requests are made by people who invest in mutual funds. Infact, Indian MFs typically disclose most of their investments in fair details. Most investors have no clue about whether the companies are ethical or not. But the MFs disclose pretty much everything.

Perhaps time has come for depositors to make similar demands as well. Banks can take advantage of many such countries where certain things are not illegal but unethical for quite a few people.

Though, this will require further burden on banks and given how many those loan accounts would be, it might be tough as well. The information costs will go up. However, it might just help them keep off such controversies as well..